Most of the risk premium in investing is for negative skewness risk; it’s compensation for the fat tail. And this includes the basic “buy and hold the stock index” strategy. Penny-picking isn’t something to avoid. It’s the investor’s bread and butter. Because compensation for risk is compatible with the EMH, opportunities are not hard to find. The pennies can more than add up to the cost of occasionally getting run over, but only if you survive getting run over with enough left to keep playing the game. That means one must diversify as much as possible and not bet over Kelly.
But all of that is just a foundation of smart beta. To do any better, one has to find the alpha: actual market anomalies incompatible with the EMH. One doesn’t always know which is which.
Most of the risk premium in investing is for negative skewness risk; it’s compensation for the fat tail. And this includes the basic “buy and hold the stock index” strategy. Penny-picking isn’t something to avoid. It’s the investor’s bread and butter. Because compensation for risk is compatible with the EMH, opportunities are not hard to find. The pennies can more than add up to the cost of occasionally getting run over, but only if you survive getting run over with enough left to keep playing the game. That means one must diversify as much as possible and not bet over Kelly.
But all of that is just a foundation of smart beta. To do any better, one has to find the alpha: actual market anomalies incompatible with the EMH. One doesn’t always know which is which.